Target Group (CBDY) Risk Analysis

The Cannabis Act (S.C. 2018, c. 16) has governed the legal production, distribution, and sale of cannabis for recreational adult use in Canada since October 17, 2018, and was amended effective October 17, 2019 to permit the sale of cannabis edibles, extracts, and topicals. Since legalization, the Canadian cannabis industry has experienced significant market maturation, including persistent oversupply conditions, sustained wholesale and retail price compression, consolidation among licensed producers, and ongoing competition from the illicit market, which continues to capture a material share of total cannabis sales in Canada. The Cannabis Act imposes significant restrictions on the marketing, branding, packaging, product formats, potency, and distribution channels for cannabis products. Health Canada administers the federal regulatory framework and retains broad authority to modify the conditions of cultivation, processing, and sale licenses, impose additional compliance requirements, or amend the regulations under the Cannabis Act. Licensees are subject to ongoing inspection, audit, and compliance monitoring by Health Canada, which has enhanced its inspection capacity and enforcement focus as the industry has matured. Individual provinces and territories maintain separate regulatory frameworks governing retail distribution, pricing, and market access, resulting in a fragmented national market with varying competitive dynamics across jurisdictions. The Government of Canada has completed the legislative review required under the Cannabis Act, and any resulting amendments to the Cannabis Act, its regulations, or other applicable laws and policies could adversely affect our business. The Canadian federal excise duty framework, which imposes the greater of a flat-rate duty or an ad valorem duty on cannabis products, has been a persistent source of margin pressure for licensed producers. Industry participants have advocated for reform of the excise duty structure, and the federal government has announced plans to explore a transition to a single national excise stamp to reduce administrative burden. However, no excise duty relief has been enacted for cannabis products. Additionally, we are subject to the risk that our Canadian licenses may not be renewed on acceptable terms, that Health Canada may impose additional conditions on our licenses, or that regulatory enforcement actions may result in fines, penalties, suspension, or revocation of our licenses. Compliance with the evolving Canadian regulatory framework requires significant ongoing investment in regulatory affairs, quality assurance, and operational processes, and any failure to maintain compliance could have a material adverse effect on our business, financial condition, and results of operations.

Our business depends on the continued legalization and regulation of marijuana at the state level through legislation, rulemaking and voter-approved ballot measures. The marijuana industry is subject to evolving laws, regulations and enforcement priorities, and there can be no assurance that current state-law protections and regulatory regimes will remain in place. Any repeal, amendment, delay in implementation, adverse regulatory development or change in enforcement priorities could restrict or eliminate our ability to conduct business in one or more jurisdictions, reduce demand for our products, increase compliance costs and materially adversely affect our business, financial condition and results of operations.

The possession and use of marijuana are illegal under U.S. federal and certain states' laws, which may negatively impact our business. The use of marijuana is regulated by both the U.S. federal government and state governments and state and U.S. federal laws regarding marijuana are often in conflict. Federal law criminalizing the use of marijuana pre-empts state laws that legalize the possession and use of marijuana for medical and recreational purposes. Any such changes in the federal government's enforcement of current federal laws could adversely affect our ability to possess or cultivate marijuana. Marijuana is a Schedule 1 controlled substance under the Controlled Substance Act ("CSA") meaning that it has a high potential for abuse, has not currently "accepted medical use" in the United States, lacks accepted safety for use under medical supervision, and may not be prescribed, marketed or sold in the United States. No drug product containing natural cannabis or naturally-derived cannabis extracts have been approved by the U.S. Food and Drug Administration for use in the U.S. or obtained registration from the United States Drug Enforcement Administration ("DEA") for commercial production and the DEA may never issue the registrations required of the commercialization of such products. We will continue to assess potential strategic acquisitions of existing or new businesses in the cannabis industry, should we determine that such activities are in our best interests and the best interests of our stockholders. Any such pursuit would involve additional risks with respect to the regulation of cannabis, particularly, if the federal government determines to actively enforce all federal laws applicable to cannabis.

Local, state and federal marijuana laws and regulations are broad in scope and subject to evolving interpretations, which require us to incur potentially substantial costs associated with compliance and could alter our business plans. In addition, violations of these laws or allegations of such violations could disrupt our business and materially affect our operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our business. We cannot predict the nature of any such future laws, regulations, interpretations or applications, nor can we determine what effect governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.